One great way of playing the market is by using a trailing stop to simply follow the stock up. A trailing stop is ideal because it follows the stock up when the stock does go up, but it does not pull back as the stock pulls back. This allows you to limit your losses and secure your gains.
There are a ton of advantages to using trailing stops.
1. Limited Loss Potential
You need a way to limit your losses in the stock market. No matter how good of a trader you are you will eventually have losses. They key thing is to keep those losses short so that they do not impact your bottom line very much.
If you decided to place a 10% stop for instance you would be risking only 10% of the investment that you just made. If the stock suddenly pulled back 50% you would get out near the top and could wait for it to turn around before getting back in.
2. Doesn't Limit Gains
A second advantage of using trailing stops is that it does not limit the potential gain of the position. If you bought a stock and placed a 10% stop loss on it you would not be limiting your gains, only your losses. The stock could double and you would still be in it. Only once the stock starts to turn around 10% or more would your stop be activated and your position would be sold.
3. It Takes the Emotions Out of Trading
Everybody has emotions. But when you are dealing with money those emotions can affect you in a negative way as they make it harder to think clearly.
Creating your own game plan is important. But it is also important to stick to your plan and not change it every 5 minutes. That is why trailing stops are so powerful because you just set it up and never have to make another decision about the trade again.
The trailing stop will follow the stock up and the trailing stop will eventually get you out of the position (hopefully for a profit). The only thing you need to do is to figure out how far behind you want to trail the stock and then walk away.
The great thing about this is that you can allow your computer to apply your "game plan" for you. Because computers never panic sell and only do what they are told this can be a great way to stick to your plan and not alter it every time something major happens.
There are a ton of advantages to using trailing stops.
1. Limited Loss Potential
You need a way to limit your losses in the stock market. No matter how good of a trader you are you will eventually have losses. They key thing is to keep those losses short so that they do not impact your bottom line very much.
If you decided to place a 10% stop for instance you would be risking only 10% of the investment that you just made. If the stock suddenly pulled back 50% you would get out near the top and could wait for it to turn around before getting back in.
2. Doesn't Limit Gains
A second advantage of using trailing stops is that it does not limit the potential gain of the position. If you bought a stock and placed a 10% stop loss on it you would not be limiting your gains, only your losses. The stock could double and you would still be in it. Only once the stock starts to turn around 10% or more would your stop be activated and your position would be sold.
3. It Takes the Emotions Out of Trading
Everybody has emotions. But when you are dealing with money those emotions can affect you in a negative way as they make it harder to think clearly.
Creating your own game plan is important. But it is also important to stick to your plan and not change it every 5 minutes. That is why trailing stops are so powerful because you just set it up and never have to make another decision about the trade again.
The trailing stop will follow the stock up and the trailing stop will eventually get you out of the position (hopefully for a profit). The only thing you need to do is to figure out how far behind you want to trail the stock and then walk away.
The great thing about this is that you can allow your computer to apply your "game plan" for you. Because computers never panic sell and only do what they are told this can be a great way to stick to your plan and not alter it every time something major happens.
About the Author:
To find more about the trailing stop orders or to get other trading tips visit Shaun's site which offers stock tips. Free reprint available from: Advantages of Trailing Stops.
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